GAIL (India) Ltd., slid more than 4 percent lower after domestic broking firm Motilal Oswal Securities downgraded the stock to a ‘sell' rating citing potential losses from U.S. shale import contracts signed by the company.
The state-owned gas distribution company signed contracts worth 5.8 million metric tonnes per annum (mmtpa) with two U.S. companies. The offtake from these contracts is expected to commence by early 2018 but higher price of U.S. shale is making it tough for the company to find customers.
Due to high liquefaction and transportation cost, they are priced 20-30 percent higher than spot LNG in Asia-Pacific. As a result, GAIL has been unable to find customers, though offtake is expected to commence latest from early 2018.Motilal Oswal Securities Report
GAIL has a 20-year contract to buy 3.5 mmtpa of LNG from Cheniere's Sabine Pass LNG terminals and 2.3 mmtpa from Dominion Cove Point. With fall in realisations, these long-term contracts could risk approximately 20 percent of company's earnings before interest, tax and depreciation and amortisation, according to Motilal Oswal.
We estimate that a hit of $1/mmBtu (million British thermal unit) may wipe out approximately 20 percent of GAIL's EBITDA.Motilal Oswal Securities Report
The brokerage house expects the transmissions and trading segments to grow on higher domestic gas production and LNG imports, while the petrochemical segment's volume will grow led by higher utilisation in the PATA plant.
In the last 12-months, GAIL (India) has underperformed the S&P BSE India Oil & Gas Index as the stock rose 39 percent as against a 48 percent rise in the index. Of the 38 analysts tracked by Bloomberg, 20 have a buy rating on the stock.
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